Public Comps and Precedent Transactions Flashcards
What are public comps?
comparable public companies to see how our co compares
What do you use public comps for?
- less rigorous
- use to check DCF results
What type of company needs comps?
startups b/c too early for DCF
What are the steps to public comps analysis?
- select set
- decide on metrics
- calc metrics and mults
- apply the mults
PC: What is an appropriate set?
- based on ind, geog, financial size
- 5-10 cos
PC: What criteria for selecting appropriate set?
- similar rev- eg. for 10bil rev 5 to 50 is ok
- geography
PC: Don’ts for selecting appropriate set?
- no pairing US and non-US b/c of accounting diff
- don’t screen by EV or EBITDA
- don’t be too specific if too little cos in exact space. Instead, broden def, restrict rev
PC selecting set: what is an example of an appropriate range?
for 10bil co range of 5 to 50 is ok
PC selecting set: what happens if too little companies in your biz line?
broaden definition, but restrict on rev instead
PC which metrics: what is a good combi to select?
1 profit metric, 2 revenue metrics
PC which metrics: what about non-present metrics?
- historical: eg. LTM eg.
- projected eg. calendar year 2030 projected rev
PC calculate metrics and mults: what do you calc?
- current EqV, current TEV
- all the metrics you decided on
PC calculate metrics and mults: what happens if fiscal years end on different dates?
calenderize
what happens to mults if co is growing?
decline
What does public comps produce?
calculate co implied value using current val of comps
PC: applying the mults: what do you calculate?
Step 1:
calculate for all the mults: min, 25h, median, 75th, max
- for: all the companies, our co,
Step 2:
For each company and ours, calculate the multiples you’ve chosen, and for the time periods you’ve chosen
Step 3:
calculate the minimum, 25th percentile, median, 75th percentile, and
maximum for each version of each multiple (aka it’s time periods too), and apply those multiples to your company to value it.
(comp mults from step 2 x raw co data)
- this will give you the numerators of mults eg. TEV. Comment on the diff TEV values derived eg. from Revenue Mults, EBITDA mults
Step 4:
Find Implied TEV, Convert to Implied EqV, divide by diluted share count to get Implied Share Price
= implied range of values for this company
, different based on revenue mults, ebitda mults
What is precedent transactions?
method of valuing a company based on the purchase multiples recently paid to acquire comparable companies.
PT: how reliable is it?
- less reliable
- most random output
- highest mults
- b/c of control premium
PT: et tu private cos?
difficult b/c no readily available share price
PT: What screening criteria?
- time
- financial criteria
- sellers’- industry, geography, financial size
PT: What time frames are ok?
2-3 years
but for cyclical industries sometimes longer to see mults change over biz cycle
PT: What financial criteria?
transactional value- purchase EqV or Purchase TEV
PT: what type of mults do we focus on?
historical mults eg. LTM Rev, LTM EBITDA
PT: why focus on historical mults?
difficult to find projections for acquired cos as of the acquisition
PT: At what point of time do you calculate the metrics and mults?
based on purchase price as of deal announcement date
PT: what kind of output do you get?
still min 25 median 75 max
dat less consistent b/c companies are acquired for different reasons
PT: What are 2 potential problems with deal structure that can affect the PT?
- earn outs: portion of purchase price paid in future if seller meets certain goal
- if deal has stock, might be more expensive b/c sellers think stock is fake money
PT: what’s an earn out deal
portion of purchase price paid in future if seller meets certain goal
PT: What kinds of deals can you use in the set?
- try to have true 100% acquisitions
- if not possible: can use majority deals (at least 50%) bought but don’t mix maj min deals
PT: Why can’t we mix maj-min deals in the same set?
may not be control premium in min stake deals
PT: What happens in final?
Step 1: Find all the percentiles for all the mults
Step 2: Apply all the mults to get range of TEV
Why is it impt to select PC and PT that are similar?
- similar DR and FCF -> then if trade at higher mults it/s b/c expected cash flow growth rate is higher
What must you not screen for when picking sets for PC and PT?
EBIT or EBITDA
PC vs PT: screening criteria
PT has 1 more criteria: time
PC vs PT: Metrics
PT use historical metrics and mults b/c difficult to find projections as at deal announcement date
PC vs PT: calcs
PT: all mults based on purchase price as at announcement date
PC vs PT: Output
PT has higher mults b/c control premium
How do u find market and financial info for PC?
- annual & interim filings: Current EqVal and Current TEV, calc diluted share count from there
- LTM metrics- most recent annual results + results from most recent partial period - results from same partial period last year
- Projected figures- equity research, consensus figures on CapIQ
- mults- divide Current EqV and Current TEV by appropriate metric
How do you find market and financial info for PT?
- find acquired co filings just before deal was announced, calc LTM metrics from this
- Calc Transaction EqVal and TEV: use purchase price acquirer paid, move from EqV to TEV in usual way, using co’s most recent BS as of announcement date
Why use mix of rev and profitability mults?
u want to value a co in relation to how much it sells and how much it keeps of those sales
How do you interpret public comps? What if median mults are above or below the ones of the co being valued?
Depends on how GR and margins of co compare to comps
If GR and margins are similar but mults are diff- co. is mispriced
can u include both open and closed deals in PT?
Yes b/c PT reflects overall market activity
Why do PT result in more random data than PC?
- cheap- co. could’ve sold itself b/c distressed
- another was ex b/c acquirer wanted it badly and was willing to pay high price
How do you factor in earn-outs in PT?
assume 50% chance of being paid out
multiply earnout by 50% and add to purchase price
How do you factor in expected synergies?
- generally don’t b/c speculative
- if include, might increase projected rev or EBITDA figures which lowers mults
If there’s a PT where buyer acquired 80% of seller, how to calc val mult?
- mults always based on 100% of seller value
Why do you use median mults rather than average mults or other percentiles?
don’t want outliers to push up your numbers
